Financial disclosures are meant to level the playing field. But when information becomes too complex, even sophisticated investors can strategically tune out.
A study, co-authored by Jared Williams, professor of finance at the University of South Florida, introduces the idea of “coordinated inattention.” Published in Management Science, the research shows that investors may rationally ignore complicated disclosures if they believe others will do the same.
In markets where outcomes depend partly on aligning with other participants, paying close attention can actually be suboptimal. If less sophisticated investors are likely to overlook dense or technical information, more sophisticated investors may choose to ignore it as well to avoid acting alone.
Using a formal economic model and controlled laboratory experiments, the researchers found that coordination incentives sharply reduced the likelihood that participants analyzed disclosures when those disclosures were difficult or costly to process. When disclosures were simpler, coordinated inattention largely disappeared.
Beliefs also played a role. Participants were less likely to analyze information when they thought others wouldn’t understand it.
Interestingly, overconfidence and a tendency to overestimate others’ abilities sometimes counteracted this effect, leading to more analysis than theory alone predicted.
The findings carry implications for regulators and firms. Complex disclosures don’t just burden individual investors, they can dampen attention across the market.
Authors: Hong Qu, Kennesaw State University; Jared Williams, University of South Florida; Ran Zhao, Peking University; Anthony Kwasnica, Florida State University.